We will see pull backs like we had last week from time to time but for the moment the end is not here. I had lunch recently with some former co-workers and no one felt comfortable being bullish on the rally -- they all expect a sharp downturn in the market to begin at any time. Asset flows for mutual funds? only if you want a bond fund. I just saw another comparison to 1929 and the big rally that occurred before the bottom fell out in 1930-1933. This is great news for the market -- as long as the wally of worry exists the market can keep rising. When everyone expects the rally to never end and that stocks are the place to be, that's when the end comes. We are so far away from that its not funny.
A few other reasons the rally can end:
the fed raises rates or stops the flow funds into the economy;
the chinese decide to raise the value of their currency vs. the dollar dramatically
the leading indicators on the economy roll over and point to a slow down.
I don't expect any of these to really happen until next year at the earliest -- plus just because the fed starts to raise doesn't mean the end is nigh -- it took a few years from when the fed first raised rates to when the rally ended. if they raise rates faster than obviously it will take less time to end the rally but I think the Fed's fear of pulling the plug too soon and leading to a fall back to the next depression will keep the money flowing.
MXWL -- they announced a deal with Continental to sell lots of ultracapacitors to the auto industry -- this market is just getting started. the stock is likely expensive having run up a few dollars in a matter of days but its one to keep an eye on. This market will be huge -- ultracapacitors will be a key to transitioning the market towards more electricity use within cars.
ERII -- if this stock pulls back towards 5.50 again, I plan on putting on a good position.
TCAP -- actually raised their dividend -- do the same as ARCC. Both have been great stocks -- ARCC is closing in on its NAV from Q2 but that NAV is likely 10-20% higher due to the improvement in the market. we'll see when they report.
BTW, not saying you can't take profits, raise cash or start a short position to hedge yourself given how far we've come. I just think we are going higher. 2003 we paused for several months around these levels. quite possible that happens again.
MCD -- interesting they raised their dividend to a 3.8% yield -- that seems like a high yield to me for this kind of quality company. lots of chinese and indians need to be fed.
Monday, September 28, 2009
Monday, September 14, 2009
asset inflation
Option expiration week -- who knows what will happen this week. On the one hand there is big open interest around 1000 -- otherwise known as straddles. That could pull us lower -- not to mention the fact that the market has gone up for several days in a row without any break. 1035 was a fibonacci area and was expected to lead to consolidation -- so far its sort of working in that the futures can't get much past it. That said, besides Cramer what talking head is bullish? I probably don't watch enough CNBC to really say that but it just seems like everywhere you turn you find doubting thomas' about this rally.
I saw an analysis this morning that said the market was discounting 3-3.5% growth for 2010 in GDP and the analyst thought that rate was probably 2x what was likely. Based on ECRI, I would argue the growth for next year is likely to be faster than most expect -- is that faster than 3.5%? don't know because I'm not sure how many people expect that rate of growth.
But while there are fundamental reasons for the rally -- recovery -- there is also a huge driver known as liquidity -- the fed and every other central bank is pumping out money like crazy and it has to go somewhere -- almost every asset class is gaining in value. its called asset inflation and it happens when excess money needs to find a home and goods inflation isn't possible. I would say excess supply is a good reason why we won't see goods inflation at least for awhile.
The central banks pumping in money is leading to risk trades being put on all over the world -- especially financed by carry trades like taking advantage of the zero rates within the US. As long as the Fed keeps short rates near zero, you should assume the 10 year and 30 year won't get too far above where we are now -- too many arbitrageurs will prevent that -- people will borrow short to lend long and that might be stupid longer term but its very profitable as long as it lasts.
The biggest risk now is that the Chinese change the dollar peg because that is the source of greatest imbalance in the market -- the chinese currency is not being allowed to reach its true value and that causes imbalances to build in the market as everyone tries to find a way around the chinese currency's inability to rise. think of it like water trying to get into a basement -- it will search all around for a weak point and won't stop until the pressure is relieved. the pressure in the currency markets can build for years and then explode. I have a quarter of my assets in asian funds that invest in companies seeking local growth -- i.e. not exporters who will get crushed by the chinese currency soaring.
big question will be will my currency gains from being in non-dollar assets offset the losses that might come from asian stocks selling off figuring the export boom is over. who knows.
FLIR -- ugh! stock is up huge in the last week. I forgot that FLIR is a company that does one warning and is done -- they generally give conservative guidance and usually don't have to adjust lower but when they do its usually the end of the problems -- going forward they generally start beating again. looking around in late august this stock was too cheap compared to others -- their secular growth is huge but the gov business held me back because of all the talk of no growth. guessing someone decided it was too cheap compared to other industrials and that with the economy recovering their results would jump too. on the other hand it could be merger rumors too. not sure. I'm hoping for a pull back to increase my stake a bit.
more to come
I saw an analysis this morning that said the market was discounting 3-3.5% growth for 2010 in GDP and the analyst thought that rate was probably 2x what was likely. Based on ECRI, I would argue the growth for next year is likely to be faster than most expect -- is that faster than 3.5%? don't know because I'm not sure how many people expect that rate of growth.
But while there are fundamental reasons for the rally -- recovery -- there is also a huge driver known as liquidity -- the fed and every other central bank is pumping out money like crazy and it has to go somewhere -- almost every asset class is gaining in value. its called asset inflation and it happens when excess money needs to find a home and goods inflation isn't possible. I would say excess supply is a good reason why we won't see goods inflation at least for awhile.
The central banks pumping in money is leading to risk trades being put on all over the world -- especially financed by carry trades like taking advantage of the zero rates within the US. As long as the Fed keeps short rates near zero, you should assume the 10 year and 30 year won't get too far above where we are now -- too many arbitrageurs will prevent that -- people will borrow short to lend long and that might be stupid longer term but its very profitable as long as it lasts.
The biggest risk now is that the Chinese change the dollar peg because that is the source of greatest imbalance in the market -- the chinese currency is not being allowed to reach its true value and that causes imbalances to build in the market as everyone tries to find a way around the chinese currency's inability to rise. think of it like water trying to get into a basement -- it will search all around for a weak point and won't stop until the pressure is relieved. the pressure in the currency markets can build for years and then explode. I have a quarter of my assets in asian funds that invest in companies seeking local growth -- i.e. not exporters who will get crushed by the chinese currency soaring.
big question will be will my currency gains from being in non-dollar assets offset the losses that might come from asian stocks selling off figuring the export boom is over. who knows.
FLIR -- ugh! stock is up huge in the last week. I forgot that FLIR is a company that does one warning and is done -- they generally give conservative guidance and usually don't have to adjust lower but when they do its usually the end of the problems -- going forward they generally start beating again. looking around in late august this stock was too cheap compared to others -- their secular growth is huge but the gov business held me back because of all the talk of no growth. guessing someone decided it was too cheap compared to other industrials and that with the economy recovering their results would jump too. on the other hand it could be merger rumors too. not sure. I'm hoping for a pull back to increase my stake a bit.
more to come
Tuesday, September 8, 2009
did you buy last week's pull back?
The VIX spiked to 29 last week -- a huge move in percentage terms given a shallow pull back of only 3-4% for the market. That told you we weren't going much lower -- too many people were positioned for a big drop paying big premiums for puts -- when everyone realizes they might need insurance, that is when it will be most expensive. Are we just going to spurt to new highs? that is an interesting question. Its harder from here given the drop in the VIX (today's jump is holiday distortion) and options expiration approaching. Last month I was sure we wouldn't break to new highs and then what happened? new highs on expiration friday. Guess everyone else had the same thought.
So the question will be are we going past 1040 before next friday? I am somewhat skeptical again given that this area is around one of those fibonacci numbers -- we paused for 2 months at the last one near 950. So the market rallies another 8% and we pause for a shorter time period? that seems too aggressive. on the other hand the demand for stocks is huge -- unrelenting -- so why not assume further gains? tough call. For a trader the key is to have the most exposure when the odds are in your favor and to reduce exposure as it gets harder.
One thing that is undeniable? have you seen what the commodity tech players are doing? wow. semi's, disk drives, EMS, distributors like AVT, etc. economy has to be getting better unless you assume that all of these industries have removed so much supply that even weak demand can drive an upcycle -- is that even possible for these managements to do? history says no.
Stocks:
One fly in the ointment is CY -- they are supposed to be perfectly positioned given their programmable system on a chip business but the stock has been weak of late -- granted after a huge move off the bottom. watching this one. as far as I know there is nothing wrong but I don't have enough good info to know for sure. this could be a great opportunity to pick up a name on a pullback. I'll try to do some more work on it.
that's it for now
So the question will be are we going past 1040 before next friday? I am somewhat skeptical again given that this area is around one of those fibonacci numbers -- we paused for 2 months at the last one near 950. So the market rallies another 8% and we pause for a shorter time period? that seems too aggressive. on the other hand the demand for stocks is huge -- unrelenting -- so why not assume further gains? tough call. For a trader the key is to have the most exposure when the odds are in your favor and to reduce exposure as it gets harder.
One thing that is undeniable? have you seen what the commodity tech players are doing? wow. semi's, disk drives, EMS, distributors like AVT, etc. economy has to be getting better unless you assume that all of these industries have removed so much supply that even weak demand can drive an upcycle -- is that even possible for these managements to do? history says no.
Stocks:
One fly in the ointment is CY -- they are supposed to be perfectly positioned given their programmable system on a chip business but the stock has been weak of late -- granted after a huge move off the bottom. watching this one. as far as I know there is nothing wrong but I don't have enough good info to know for sure. this could be a great opportunity to pick up a name on a pullback. I'll try to do some more work on it.
that's it for now
Wednesday, August 26, 2009
update
so much for being back huh? one post and then another 5 month break. oh well. I have been busy learning how to trade options -- understanding volatility and its impact on options and basically trying to make money trading. that doesn't make sense for what was supposed to be an investment related blog like this one.
Anyway, I wish I would have made several posts in the past -- just to get my market thoughts on record. that's kind of why I started this in the first place -- to create a record of my thinking.
Its end of august and we have had a huge rally --especially since mid july where the market has barely corrected since then. I could easily see another 3-5% drop like we had monday last week but many many folks are adamant that we are topping -- that we will see a big correction -- call it 10-15% drop or something like that. Its possible -- the last year should have taught us that anything is possible -- but I am skeptical we will see that big of a pullback.
Why? simple -- ECRI says we are about to have one of the strongest recoveries since the early 1980's. How many people believe that? even the bullish are likely just playing the momentum game to some extent and hopeful of some kind of recovery. But ECRI has an amazing track record. I have yet to see them be wrong about a big call in 9 years of watching them -- they don't make false calls about recessions or recoveries. They are absolutely adamant we are going to see a strong recovery.
How could they be so sure? because they use leading indicators and these indicators are all pointing upward. Most people do not understand the difference between leading, coincident and lagging but that's what ECRI brings to the table. They say the recession is ending this summer, which means by definition the coincident and lagging indicators are at their worst levels.
That's why it doesn't feel like a recovery yet -- but over the next several months things will begin to feel a lot stronger. Oh, and their long leading index is still pointing upward too -- that means no double dip either. I just don't see how we are going to get a strong pull back when the leading indicators are acting so strong.
One more critical point -- everyone that I read that hates this rally says its all driven by stimulus from fed and gov spending and is therefore unsustainable -- no kidding the fed cannot be successful longer term but the last fed induced recovery lasted years. its way too early to focus on the coming disaster. The other point to make is that way too many people keep saying I would be bullish except for ...... I would join the bullish market if only .... wasn't true. I won't believe the housing market has bottomed until ....... well the problem is that you pay a high price for certainty -- by the time its obvious that the recovery is in place the S&P 500 will be higher than it is now. that's my guess. We will get to levels not realized before.
All that said -- we are certainly ready for a correction -- another few percent drop like we have had because bullishness has gotten a little ahead of it self. there are 2 ways to work off the overbought condition -- time and price. if we are flat for awhile that is enough. the highs on friday were the first new highs in almost 2 weeks -- amazing in hindsight.
now many arguing for a bigger decline say that it will be as obvious in hindsight that the trade was to sell now as it is obvious in hindsight that the trade was to buy in march. my retort is that a correction yes -- mild as the others -- yes but a big pull back no. not while the leading indicators are soaring.
Many are expecting volatility to pick up in september and october -- no way this happens to the extent people think -- that's last year's issue -- think back to the crash of '87 and what was on people's minds in 1988 as we approached the fall -- everyone was all worried about another crash. didn't happen. watched pots don't boil and market concerns that everyone has don't come to fruition.
US is now a carry trade currency. what does that mean? rest of world will outperform US markets -- way to play this is asian markets focused on domestic demand -- not the exporters. china's currency is being held artificially low -- that is unsustainable but it could take a long time to break. but this is in the category of soros and the pound -- its a matter of time. when the chinese currency jumps, the exporters will get hurt but the domestic demand will get a big help. either way being a US dollar investor it helps if you have assets in other currencies that appreciate.
Stocks -- well most of my favorites are doing OK --
TSRA won its legal battles and has rallied but its been stuck in the mid 20's since. another ruling due friday -- we shall see but I can't imagine they lose this ruling -- judge was over ruled on same issues so he has to know he would be overruled again -- only stubborness would make him rule against TSRA again. should get a pop in the stock towards 27 or higher depending on what is going on in the rest of the market. wireless ruling wasn't as big of a deal as I had hoped because most of those they were suing have fallen on hard times or have shifted to Amkor -- who has chosen not to pay for some of this new business. they are continuing to innovate and that will expand their market over time but with the court cases wrapping up the stock is getting tricky. Its one part catalyst from new licensees due to court victories and one part long term growth story due to their continued innovation. as you can imagine the first catalyst leads to a jump in the stock while the second leads to longer term appreciation if successful -- no guarantees they will be as successful now as in the past. If the stock pops, I hope to reduce my position size.
UEPS is doing great -- just bought back 16% of stock as a private equity firm had to liquidate to pay off clients.
ILMN -- ok -- talk of delays is not good but stock holding up fine. their innovation is still strong.
LH -- got worried about obamacare because they would be a target -- only way to cut costs is to force less care on the system and fewer tests is part of that (MRI's, x-ray's CT scans, etc more at risk). Valuation and cash flow remain attractive -- personalized medicine remains a growth angle over long term and LH is a play on that.
FLIR -- no secular issues but near term looks icky because of their hopes for flat government revenues -- basically they have been quite successful in recent years on gov biz and that is hard to replace after awhile. stock has been weak -- this one I was glad I sold in the high 20's to low 30's. still have small position.
POWI -- sold this one in the 24-25 range and for awhile it looked pretty smart -- stock bottomed in the teens but now its in the low 30's. just lost track of it with everything else I have going on.
CLB -- bought just a little bit near $50 and sold half near $78 so I'm upset I didn't have the guts to buy more. this is a great secular story -- they help oil and gas companies get more production out of their fields -- a technology/services play that benefits from the secular trend that oil is getting harder and harder to get out of the ground. they have great cash flow and a smart management team.
MXWL -- I sold this last year near $7.50 like an idiot. I had the chance to buy it back for a few months in the 4-7 range but didn't. I did sell puts on it twice and kept the premium so that was neat but in the meantime the stock has doubled off the bottom and they continue to grow revenues and improve margins. I continue to watch this and hope to get involved again. to me they are in the right place but the problem is their business is a little more commodity like to me than I would normally like.
ARCC -- a new position established near the bottom -- they are a business development company that lends money to private businesses as part of middle market private equity. they fill the gap between banks and investment banks -- these are relatively smaller companies so their choices are much more limited now. I bought in around $4 -- should have backed up the truck but who knew. What I bet on was they had the balance sheet to survive and there was no better time to be in middle market lending then during a huge credit panic. rather than buy junk bond funds I bought this. Its like a closed end fund and at the time was at $4 vs. NAV of more than $11. now we are in the $9 range so its still below NAV but not as much. still figure there is opportunity but not as much. I also bought into TCAP.
Besides MXWL, I am keeping an eye on ERII (water play -- they sell key part for desalination plants, good position but very little on going revenue stream so dependent on new plants) and CY (programmable system on chip play -- replacing microcontrollers because of better flexibility, faster time to market and lower overall cost). keeping my eyes open for other stories too.
hope to post more often now.
Anyway, I wish I would have made several posts in the past -- just to get my market thoughts on record. that's kind of why I started this in the first place -- to create a record of my thinking.
Its end of august and we have had a huge rally --especially since mid july where the market has barely corrected since then. I could easily see another 3-5% drop like we had monday last week but many many folks are adamant that we are topping -- that we will see a big correction -- call it 10-15% drop or something like that. Its possible -- the last year should have taught us that anything is possible -- but I am skeptical we will see that big of a pullback.
Why? simple -- ECRI says we are about to have one of the strongest recoveries since the early 1980's. How many people believe that? even the bullish are likely just playing the momentum game to some extent and hopeful of some kind of recovery. But ECRI has an amazing track record. I have yet to see them be wrong about a big call in 9 years of watching them -- they don't make false calls about recessions or recoveries. They are absolutely adamant we are going to see a strong recovery.
How could they be so sure? because they use leading indicators and these indicators are all pointing upward. Most people do not understand the difference between leading, coincident and lagging but that's what ECRI brings to the table. They say the recession is ending this summer, which means by definition the coincident and lagging indicators are at their worst levels.
That's why it doesn't feel like a recovery yet -- but over the next several months things will begin to feel a lot stronger. Oh, and their long leading index is still pointing upward too -- that means no double dip either. I just don't see how we are going to get a strong pull back when the leading indicators are acting so strong.
One more critical point -- everyone that I read that hates this rally says its all driven by stimulus from fed and gov spending and is therefore unsustainable -- no kidding the fed cannot be successful longer term but the last fed induced recovery lasted years. its way too early to focus on the coming disaster. The other point to make is that way too many people keep saying I would be bullish except for ...... I would join the bullish market if only .... wasn't true. I won't believe the housing market has bottomed until ....... well the problem is that you pay a high price for certainty -- by the time its obvious that the recovery is in place the S&P 500 will be higher than it is now. that's my guess. We will get to levels not realized before.
All that said -- we are certainly ready for a correction -- another few percent drop like we have had because bullishness has gotten a little ahead of it self. there are 2 ways to work off the overbought condition -- time and price. if we are flat for awhile that is enough. the highs on friday were the first new highs in almost 2 weeks -- amazing in hindsight.
now many arguing for a bigger decline say that it will be as obvious in hindsight that the trade was to sell now as it is obvious in hindsight that the trade was to buy in march. my retort is that a correction yes -- mild as the others -- yes but a big pull back no. not while the leading indicators are soaring.
Many are expecting volatility to pick up in september and october -- no way this happens to the extent people think -- that's last year's issue -- think back to the crash of '87 and what was on people's minds in 1988 as we approached the fall -- everyone was all worried about another crash. didn't happen. watched pots don't boil and market concerns that everyone has don't come to fruition.
US is now a carry trade currency. what does that mean? rest of world will outperform US markets -- way to play this is asian markets focused on domestic demand -- not the exporters. china's currency is being held artificially low -- that is unsustainable but it could take a long time to break. but this is in the category of soros and the pound -- its a matter of time. when the chinese currency jumps, the exporters will get hurt but the domestic demand will get a big help. either way being a US dollar investor it helps if you have assets in other currencies that appreciate.
Stocks -- well most of my favorites are doing OK --
TSRA won its legal battles and has rallied but its been stuck in the mid 20's since. another ruling due friday -- we shall see but I can't imagine they lose this ruling -- judge was over ruled on same issues so he has to know he would be overruled again -- only stubborness would make him rule against TSRA again. should get a pop in the stock towards 27 or higher depending on what is going on in the rest of the market. wireless ruling wasn't as big of a deal as I had hoped because most of those they were suing have fallen on hard times or have shifted to Amkor -- who has chosen not to pay for some of this new business. they are continuing to innovate and that will expand their market over time but with the court cases wrapping up the stock is getting tricky. Its one part catalyst from new licensees due to court victories and one part long term growth story due to their continued innovation. as you can imagine the first catalyst leads to a jump in the stock while the second leads to longer term appreciation if successful -- no guarantees they will be as successful now as in the past. If the stock pops, I hope to reduce my position size.
UEPS is doing great -- just bought back 16% of stock as a private equity firm had to liquidate to pay off clients.
ILMN -- ok -- talk of delays is not good but stock holding up fine. their innovation is still strong.
LH -- got worried about obamacare because they would be a target -- only way to cut costs is to force less care on the system and fewer tests is part of that (MRI's, x-ray's CT scans, etc more at risk). Valuation and cash flow remain attractive -- personalized medicine remains a growth angle over long term and LH is a play on that.
FLIR -- no secular issues but near term looks icky because of their hopes for flat government revenues -- basically they have been quite successful in recent years on gov biz and that is hard to replace after awhile. stock has been weak -- this one I was glad I sold in the high 20's to low 30's. still have small position.
POWI -- sold this one in the 24-25 range and for awhile it looked pretty smart -- stock bottomed in the teens but now its in the low 30's. just lost track of it with everything else I have going on.
CLB -- bought just a little bit near $50 and sold half near $78 so I'm upset I didn't have the guts to buy more. this is a great secular story -- they help oil and gas companies get more production out of their fields -- a technology/services play that benefits from the secular trend that oil is getting harder and harder to get out of the ground. they have great cash flow and a smart management team.
MXWL -- I sold this last year near $7.50 like an idiot. I had the chance to buy it back for a few months in the 4-7 range but didn't. I did sell puts on it twice and kept the premium so that was neat but in the meantime the stock has doubled off the bottom and they continue to grow revenues and improve margins. I continue to watch this and hope to get involved again. to me they are in the right place but the problem is their business is a little more commodity like to me than I would normally like.
ARCC -- a new position established near the bottom -- they are a business development company that lends money to private businesses as part of middle market private equity. they fill the gap between banks and investment banks -- these are relatively smaller companies so their choices are much more limited now. I bought in around $4 -- should have backed up the truck but who knew. What I bet on was they had the balance sheet to survive and there was no better time to be in middle market lending then during a huge credit panic. rather than buy junk bond funds I bought this. Its like a closed end fund and at the time was at $4 vs. NAV of more than $11. now we are in the $9 range so its still below NAV but not as much. still figure there is opportunity but not as much. I also bought into TCAP.
Besides MXWL, I am keeping an eye on ERII (water play -- they sell key part for desalination plants, good position but very little on going revenue stream so dependent on new plants) and CY (programmable system on chip play -- replacing microcontrollers because of better flexibility, faster time to market and lower overall cost). keeping my eyes open for other stories too.
hope to post more often now.
Tuesday, March 31, 2009
I'm back
wow where did that 6 months between posts go?
its been awhile so I realize if I had any readers they are long since gone. oh well. I got swamped trying to deal with the market, my job (laid off as of mid march) and other issues (2nd child born in early January). I made lots of changes to the portfolio in the last 6 months. some stocks I chose to let go while I held on to others but at reduced position sizes. The following stocks remain in the portfolio at their pre meltdown share count:
1. UEPS - missed this one at $8 -- what a fall during the Oct/Nov time frame as clearly some hedge fund was liquidating their position. I knew that $8 was a ridiculous price given their cash flow and cash on hand -- worked out to just a few times free cash flow. Yet I didn't add to my position because if $8 is ridiculous why wouldn't $5 be even more ridiculous and why wouldn't the price continue lower? too many forced sellers who don't care about price were driving UEPS' price down and what was going to change that dynamic? no idea. holding on worked out since the stock remained above its oct/nov low during the feb/mar sell off -- at $15 recently, its doubled off its lows.
2. MMP and AB -- MLP's so the tax consequences are huge for selling. MMP has the best balance sheet of all the MLPs. AB is my upside hedge -- if things work out that stock will take off and offset the defensive nature of the rest of the portfolio. I continue to think these 2 will do fine.
3. TECH -- while I should have sold some when it rallied to the mid $60's because the valuation was at ridiculous levels but the business is still a very good one even though the stock has dropped to the mid 50's.
Those stocks we sold out of completely:
CME -- got out at $360 to $400 because there was just too much risk that volumes would collapse in a bear market and that fixed income related futures needed the credit markets to return to pre aug 2007 type leverage and derivatives usage for the earnings to grow. would rethink about buying below $200.
FDS -- buyside revenues down 40% so labor costs have to drop to be competive.
its late -- have to finish up later. lots of thoughts on our new socialist government as well as direction of economy etc.
have fun
its been awhile so I realize if I had any readers they are long since gone. oh well. I got swamped trying to deal with the market, my job (laid off as of mid march) and other issues (2nd child born in early January). I made lots of changes to the portfolio in the last 6 months. some stocks I chose to let go while I held on to others but at reduced position sizes. The following stocks remain in the portfolio at their pre meltdown share count:
1. UEPS - missed this one at $8 -- what a fall during the Oct/Nov time frame as clearly some hedge fund was liquidating their position. I knew that $8 was a ridiculous price given their cash flow and cash on hand -- worked out to just a few times free cash flow. Yet I didn't add to my position because if $8 is ridiculous why wouldn't $5 be even more ridiculous and why wouldn't the price continue lower? too many forced sellers who don't care about price were driving UEPS' price down and what was going to change that dynamic? no idea. holding on worked out since the stock remained above its oct/nov low during the feb/mar sell off -- at $15 recently, its doubled off its lows.
2. MMP and AB -- MLP's so the tax consequences are huge for selling. MMP has the best balance sheet of all the MLPs. AB is my upside hedge -- if things work out that stock will take off and offset the defensive nature of the rest of the portfolio. I continue to think these 2 will do fine.
3. TECH -- while I should have sold some when it rallied to the mid $60's because the valuation was at ridiculous levels but the business is still a very good one even though the stock has dropped to the mid 50's.
Those stocks we sold out of completely:
CME -- got out at $360 to $400 because there was just too much risk that volumes would collapse in a bear market and that fixed income related futures needed the credit markets to return to pre aug 2007 type leverage and derivatives usage for the earnings to grow. would rethink about buying below $200.
FDS -- buyside revenues down 40% so labor costs have to drop to be competive.
its late -- have to finish up later. lots of thoughts on our new socialist government as well as direction of economy etc.
have fun
Tuesday, September 30, 2008
latest thoughts
Been an interesting period what with lehman, aig, wamu and now wachovia all either gone or dealt with -- the market up until the bailout bill failed had been in a narrow range for the past week or so-- from 1180 to 1220. with a 9% mini crash today I think we are getting closer to a better near term low -- the one from a couple of thursday's ago was manipulated due to all the policy response including the short selling rules -- incredibly stupid by the way. This next low has the chance of being real -- based on a selling exhaustion that rises almost for no explainable reason -- that's normally what happens.
at the end, the market just bottoms and starts rising. there is no good news to drive it, in fact the news is universally bad at the time. I can't imagine worse news that what we have now -- an interventionist government destroying as much value as possible -- causing a domino effect of bank failures combined with unbelievably horrible leading indicators of massively slowing growth. earnings estimates for almost every company are wrong but stock prices reflect that in many cases.
On the one hand I believe the market could bottom somewhere in the 800 to 900 range -- down 650 to 750 from the peak -- that would make sense from the standpoint of the worst financial crisis since the great depression. Right now the decline barely ranks -- does that make sense given all that has happened?
but its hard to believe we are going to get there right now -- I would say sometime in the spring of next year at best. in the mean time maybe we drop more but I find it hard to believe after today's drubbing that we aren't getting closer to a bounce -- maybe we fall another 5-10% tomorrow but that gets you to 1000 on the S&P -- are we going to drop more than that before a near term bottom? I wouldn't think so. then a rally back up towards 1200 -- maybe if we are lucky. a trading range for a couple of months and then further declines.
but all that is just for fun -- key is stocks -- what are my latest thoughts:
well -- didn't pull the trigger on the FDS despite having opportunities to sell all my shares above $60 -- ugh! Did sell some ILMN -- just trimming around $85 ($42.50 post split). Also sold some CME at $400. Sold the POWI today at $24.8 -- always use limit orders -- I put the sale order at the market in at $25.1 but my actual trade done 30 cents lower. still with the stock around $23 by the close its not a bad trade so far. I still like the company but wanted to raise some cash. Of course the time to do that was in May (1400 S&P) or back in Dec (1400 to 1500 S&P) but I didn't realize the permabears were finally going to be right after predicting doom and gloom for many years.
still looking to buy more TECH, LH and UEPS. Today was the day to buy UEPS but I was too busy dealing with work issues -- stock closed at $21.59 -- the bottom of its range since 2005. You either have to believe that the stock will break out of its trading range to the downside or that this is another time to pick up more shares. granted global calamity is an excuse for breaking down but you also have the SA government finally suggesting a decision is at hand.
I have been wary of ERII because it is a play on desalinization -- which requires really expensive plants, which requires lots of capital -- one would think that would be a problem in this environment. Of course fresh drinking water is a priority too. stock has remained quite resilient -- similar to MXWL.
I bought some options on TSRA today (monday) because the stock got hit worse than other stocks and decisions on their cases should be due soon. I bought the Nov 17.50's -- not that I am an expert in terms of picking contracts. I decided I wanted to go further out than october but didn't want to pay too much per contract so I picked the 17.50s rather than the $15's.
I also dipped my toes in the water on some S&P calls (actually based on SPY) I have plenty of powder dry to buy more if the market keeps selling off. I will probably double down if the market continues to decline. what I mean by that is to put the same amount of money on the next trade but because the price will have dropped I can buy more contracts.
At this point the only financials I would think about buying are SCHW, CME and maybe GS. Although I wonder about BX at some point. SCHW because they don't make money on their own money but rather on their clients money -- which is declining for now but this gives you a nice kicker on the market. CME because of their monopoly. GS because they are the best, period. BX because they have cash to take advantage of the downturn. if you believe we are in for an extended flat to down market than none of these is a good choice.
Tuesday, September 9, 2008
bye bye Fannie and Freddie and other gibberish
Well -- its time for my once every few weeks post -- hope to get a little better about posting soon.
FNM and FRE dying today -- about time. What sucks is not making any money off of this -- what has been an obvious call -- an understanding of economics was all that was necessary to know they would eventually have to be destroyed by the system they created -- there is no one in the mortgage finance chain that cares about anything -- everyone makes assumptions but no one really checks or really underwrites -- maybe now given all that's happened but not last year when it mattered. Think about it -- the originator doesn't care whether you are going to pay back your loan or whether the home value can support the mortgage -- they are going to sell the mortgage to fnm or fre or some other securitizer. FNM or FRE doesn't care because even know they have a guarantee fee they are nationally diversified, only guarantee loans with 20% down payments and housing prices have never declined significantly across the board in this country.
Oops -- guess we can throw that one out. nationally diversified doesn't matter much when all houses are declining. 20% down payments don't matter when the home values are dropping by that much especially given the cost of carry -- i.e. a foreclosed home has lots of costs that must be covered and included in the loss estimates -- everything from taxes to fixing what's broke.
the person buying the mortgage securities doesn't care about credit risks either because they assume someone else did it -- like the originator or fnm or fre. they also assume they have the down payments and the national diversification, etc.. etc...
I still think deleveraging is occurring and that it will impact the economy and the markets. the only risk is that stocks already reflect that but I don't see that as being possible. international growth is slowing and that will pressure exports too.
Here are the stocks I want to buy more of --
FLIR -- they have solid demand and rapid innovation -- there is almost no limit to the number of applications for their infrared tech. Latest one I heard is building energy conservation as well as safety. They can use the temp readings from the infrared cameras to know where all the bodies are in the building -- lets them adjust the HVAC and the lighting to where the bodies are. Plus in an emergency, they can determine where the bodies are or were prior to the emergency. That might help the emergency responders focus their saving efforts.
UEPS -- bought a company that licensed their early tech to offer hardware and software within Russia and the FSU. This broadens their markets to include areas outside of Africa -- its a big deal yet the stock didn't react the day of the announcement because of EPS fears (they reported the next day). EPS report went well so the stock has jumped from the $24 to $27 level. Still love the story -- its going to be huge. Haven't bought more yet but on a pull back towards $25 I will.
LH -- at the right price -- closer to $70 I would love to buy more. At $75 its a little harder. While the last quarter came in a little light, the stock's valuation is low and the secular drivers are at their back -- its all about increased testing using genetic techniques that will improve outcomes. They are one of the biggest beneficiaries of ILMN's technology yet they sell at a fraction of ILMN's multiple.
TECH -- more genetic growth at a reasonable price. I think this one will pull back more -- maybe to $70.
What I would prefer to trim at the right price:
FDS -- anytime I can sell this with a 23x PE in this kind of environment I probably will. great company but they sell to financial services firms.
POWI -- $30 would be nice but its closer to $25. its a great story but is it as good as FLIR or UEPS? doubtful.
ILMN -- great story but its too big a position size given the risks that any slowdown will be met with sharp selling pressure. something between $85 and $90 would be great.
A few other buy ideas -- MXWL, ERII, SCHW
MXWL -- they are signing deals and winning more business but now the question is at what margin -- that was the big miss last eps report. I might average down if the stock gets a 10 handle to it.
ERII -- still researching and thinking about this one -- very interesting technology but its business model is kind of weak -- all a bet on fresh water and the need to find more of it -- or in this case to make more of it. the problem with the business model is that there is no annuity to the business -- just a razor not a razor/blade business.
SCHW -- its all about asset gathering because trading commissions only account for a small percentage of schwab's revenues -- maybe 20% vs. the rest which come from asset management and net interest income -- both of which are driven by the amount of assets within schwab. they will be hurt by a fall in the markets but not as much as a fund company like AB does.
good night.
FNM and FRE dying today -- about time. What sucks is not making any money off of this -- what has been an obvious call -- an understanding of economics was all that was necessary to know they would eventually have to be destroyed by the system they created -- there is no one in the mortgage finance chain that cares about anything -- everyone makes assumptions but no one really checks or really underwrites -- maybe now given all that's happened but not last year when it mattered. Think about it -- the originator doesn't care whether you are going to pay back your loan or whether the home value can support the mortgage -- they are going to sell the mortgage to fnm or fre or some other securitizer. FNM or FRE doesn't care because even know they have a guarantee fee they are nationally diversified, only guarantee loans with 20% down payments and housing prices have never declined significantly across the board in this country.
Oops -- guess we can throw that one out. nationally diversified doesn't matter much when all houses are declining. 20% down payments don't matter when the home values are dropping by that much especially given the cost of carry -- i.e. a foreclosed home has lots of costs that must be covered and included in the loss estimates -- everything from taxes to fixing what's broke.
the person buying the mortgage securities doesn't care about credit risks either because they assume someone else did it -- like the originator or fnm or fre. they also assume they have the down payments and the national diversification, etc.. etc...
I still think deleveraging is occurring and that it will impact the economy and the markets. the only risk is that stocks already reflect that but I don't see that as being possible. international growth is slowing and that will pressure exports too.
Here are the stocks I want to buy more of --
FLIR -- they have solid demand and rapid innovation -- there is almost no limit to the number of applications for their infrared tech. Latest one I heard is building energy conservation as well as safety. They can use the temp readings from the infrared cameras to know where all the bodies are in the building -- lets them adjust the HVAC and the lighting to where the bodies are. Plus in an emergency, they can determine where the bodies are or were prior to the emergency. That might help the emergency responders focus their saving efforts.
UEPS -- bought a company that licensed their early tech to offer hardware and software within Russia and the FSU. This broadens their markets to include areas outside of Africa -- its a big deal yet the stock didn't react the day of the announcement because of EPS fears (they reported the next day). EPS report went well so the stock has jumped from the $24 to $27 level. Still love the story -- its going to be huge. Haven't bought more yet but on a pull back towards $25 I will.
LH -- at the right price -- closer to $70 I would love to buy more. At $75 its a little harder. While the last quarter came in a little light, the stock's valuation is low and the secular drivers are at their back -- its all about increased testing using genetic techniques that will improve outcomes. They are one of the biggest beneficiaries of ILMN's technology yet they sell at a fraction of ILMN's multiple.
TECH -- more genetic growth at a reasonable price. I think this one will pull back more -- maybe to $70.
What I would prefer to trim at the right price:
FDS -- anytime I can sell this with a 23x PE in this kind of environment I probably will. great company but they sell to financial services firms.
POWI -- $30 would be nice but its closer to $25. its a great story but is it as good as FLIR or UEPS? doubtful.
ILMN -- great story but its too big a position size given the risks that any slowdown will be met with sharp selling pressure. something between $85 and $90 would be great.
A few other buy ideas -- MXWL, ERII, SCHW
MXWL -- they are signing deals and winning more business but now the question is at what margin -- that was the big miss last eps report. I might average down if the stock gets a 10 handle to it.
ERII -- still researching and thinking about this one -- very interesting technology but its business model is kind of weak -- all a bet on fresh water and the need to find more of it -- or in this case to make more of it. the problem with the business model is that there is no annuity to the business -- just a razor not a razor/blade business.
SCHW -- its all about asset gathering because trading commissions only account for a small percentage of schwab's revenues -- maybe 20% vs. the rest which come from asset management and net interest income -- both of which are driven by the amount of assets within schwab. they will be hurt by a fall in the markets but not as much as a fund company like AB does.
good night.
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